Govt to withdraw conciliation offer on Vodafone dispute

As British mobile phone operator Vodafone served a fresh arbitration notice to India over the Rs 20,000 crore tax dispute, the government on Thursday said it was withdrawing the non-binding conciliation offer to the company.

 The government will defend its case in the international arbitration, Finance Minister P Chidambaram said.

“The offer is no longer there. I have already proposed to Cabinet that since Vodafone have issued a fresh arbitration notice, the original offer of a non-binding conciliation should be taken to be as withdrawn,” he said.

Vodafone filed for an arbitration on April 17, the company said in statement on Wednesday night without any further details. It said it will go ahead with international arbitration, preferably in London, to resolve the long-pending tax dispute concerning its 2007 acquisition of Hutchison Whampoa's stake in Hutchison Essar.

In 2012, the Supreme Court had ruled in favour of Vodafone saying the deal was not taxable in India. The government later that year changed the rules to enable it to tax deals that had already been concluded. It also introduced a validation clause that made Vodafone liable to pay tax in India despite the apex court’s judgment. 

Vodafone, at this stage, proceeded with initiating arbitration under the bilateral investment protection agreement signed by the Netherlands and India. It argued the retrospective amendment amounted to a denial of justice and a breach of the Indian government’s obligations to accord fair and equitable treatment to investors.

Vodafone gave the government two months to reply to the notice served under the bilateral investment treaty between India and the Netherlands. Following this, the Finance Ministry put up a proposal before the Cabinet to withdraw the conciliation offer it made to Vodafone last year.

In February, the Cabinet had put on hold a similar proposal, pending settlement of Vodafone's transfer-pricing case at the Income Tax Appellate Tribunal. The ministry sought to withdraw the conciliation talks after Vodafone demanded the transfer-pricing row be clubbed with the capital gains tax case.

After the latest move of Vodafone, the dispute is now set to be go beyond the border. Analysts say, the possible option for India is to argue that tax proceedings cannot be covered under international arbitration under the bilateral investment promotion and protection agreements (BIPA). The tax demand, which was initially around Rs 8,000 crore, has now more than doubled to Rs.20,000 crore after adding interest and penalty.